The Tycoon Report

Know What You're Really Voting For

Tuesday, November 4, 2008 | Chris Rowe


Last week I promised to bring you an article about how to profit from China. I'm going to put that series of articles on hold for now since it's Election Day. I was going to write two articles, but the one below ended up being longer than I thought. 

It's Election Day! Know what you're voting for!

I'll try to make this short and to the point. I've been encouraged by many at my firm to talk about politics this year because "in an election year, that's what people want to hear about". 

I've managed to dodge and weave and completely avoid the topic for two reasons:

1. The Tycoon Report is committed to giving you actionable advice, knowledge, education and anything that can help navigate you profitably through the stock market. It's rare that you find a newsletter written by people with real money management experience, so why talk politics?

2. Talking politics is just as controversial and sensitive as talking religion (or lack thereof). So why write anything that will inevitably anger SOMEONE?

Today I'll take the last minute leap because today's theme matches the theme I tend to consistently follow:  Making sure that you, our readers, are not manipulated by the institutions (which include politicians) to give up your hard-earned cash, and how major events will affect the economy and markets.

Here goes nothing...  (be gentle in your comments please!)

Before I start, let me say that I don't agree 100% with either party.  I happen to be fond of both presidential nominees for different reasons.  I don't know that I feel comfortable with either running mate potentially taking office as commander in chief.  I'm not going to get into each one of my beliefs, but only economic facts.  The only clue I will give you is I'm a paraplegic.  I would, of course, love a cure, and at the very least, I would like the comfort of knowing my health (or the health of others with any medical problem) will be maintained as easily as reasonably possible. 

Let's move on to the land of economics and understanding the facts (not the way a candidate wants you to think)...

One of the permanent rules I've established in my life is that if you understand a major political issue too easily when it's supposed to be a very complex issue, you're almost certainly being lied to.

Think about the Iraq war.  Why are we in Iraq?  I don't know.  I'm not saying we're wrong or right.  I'm simply stating that I don't know. If I knew exactly why, then I would be disappointed in my government for making that kind of information available.  I don't think I'd want a government that gives up top secret information about why we are there, and what we may or may not have done or found in our time spent there thus far.  It would simply be too dangerous.  But the illusion of honesty, or desire to be honest with citizens is necessary. 

There are two versions of what's going on over there. There's what "you know", and there's what's actually going on over there.

Politicians have to get votes to push their agenda. They base their pitch on the first version "what you know" to get the votes they need.  But make no mistake, you're probably not voting on what's actually happening in Iraq.  You're voting on what they want you to think about the Iraq war.

The easiest story to digest about Iraq in 2002 was that we have to go there to get a monster that will otherwise get us, again, before they attack!  While that may be part of the story, I think it's more complex than that.  And anyone who says it's not true -- that we simply were looking for WMDs -- probably shouldn't argue that we are simply there for oil.  Both stories are WAY TOO simple to be the absolute truth. 

(Please understand that I have loved ones in Iraq as I type this.  I have family in the Marines who are home from Iraq.  I have spoken in detail about the war with them.)

Blood Boiling Reader: "Okay, get to the point, Chris, before I give you a piece of MY mind..."

How this relates to the stock market, to your bank account, to your employment status, and everything The Tycoon Report should be addressing:

I just want you to know what you are really voting for in economic terms because I don't feel you are hearing the truth (surprise).  When I hear about who people are voting for these days, I ask if they're voting for "higher taxes" or "lower taxes" instead of Democrat or Republican.  When a person says they are voting for higher taxes for the wealthy, and lower taxes for those that are not, I know they have a misperception of economics.  In fact, that person might have been swayed to vote Republican, had McCain's campaign managers been smart enough to simplify how higher taxes (for the wealthy or profitable corporations) affects everyone from rich to poor.

So today, my goal is to prevent you from feeling manipulated when you look back in a couple of years. My goal is not to foolishly attempt to sway your from your beliefs, but to be sure you understand what happens when taxes are increased and why this affects everyone. 

Obama is convincing voters that only the wealthy will feel his tax policy. I'm not an economist. Warren Buffett and George Soros, two of the greatest economic minds of our time, are apparently Democrats and I respect the heck out of them.  Maybe Obama's tax plan will ultimately work. It matters little that I personally don't agree. 

But what I thought you'd find interesting is the fact that Obama knows for a fact that this isn't true. 

I personally am not offended that a politician is stating something he knows to be untrue in order to rally a large group of people around him.  I'm cool with that.  I expect that, and wouldn't expect anything less.  This is about getting votes, and not about making sense.  I get it.  Let's be honest here. 

Obama is a highly intelligent man.  I know he knows it's not true, and after this article, you will too.  Maybe he has a secret plan up his sleeve once he gets his votes.  And maybe his plan is far more complex than a guy like me is able to digest, and heck, it may work!  But I'll surely see to it that you, as a voter and as a stock holder knows the truth, as I'm sure Obama knows behind the scenes. 

While the tax taken from the individual may not have the U.S. Government stamp on it in plain sight for you to see, it will certainly be taken from everyone from top to bottom. 

Question 1: Do you buy stuff?  If you answered "yes" then you will be affected. 

Question 2: Do you get paid by a company?  If you answered "yes" then you will be affected.

To simplify it in one sentence for those who don't know: The government taxes corporations, and corporations pass the cost down to you - the employee/the consumer.  Period. 

So the government still taxes you, but does so through the price of goods, services, paychecks and of course, the stock market (including pension funds, 401ks, 529 education plans etc.)  They raise taxes on corporations, they tax you by way of corporations. 

The simple point that McCain's campaign managers foolishly failed to focus on:

Obama is stating that the trickle down effect doesn't work.  He knows for a fact that it does.  If he doesn't know that, then that's even scarier.  But I happen to respect his intelligence.  He does know it.  (Believe me, that's not an insult to him, it's a compliment, or what we call "the benefit of the doubt".)

As a business owner, I'm here to tell you why it works two ways.  Positive, and negative.

1. POSITIVE

Every business wants to grow.  The goal is simple: Make more money, hire more people, hire quality people (that as a profitable business, you can afford to hire). 

So just to review this simple philosophy:  Grow your company, pay higher wages, hire more people, hire quality people. 

People with higher wages is a good thing.  Being able to get a job is a good thing.  Higher wages means you spend more, which helps other businesses etc.

2. NEGATIVE

Even if someone thinks "trickle down" doesn't work in the positive way, they still can't deny how it works in the negative way...

When a business makes less money, it can't hire as many people (because there is this thing called "payroll" that employees are quite fond of once or twice a month).  That payroll is of course met.  If not, employees may not be as motivated to come to work.  So how is profitability maintained when Uncle Sam increases his cut?  How is negative growth (losses) avoided?  Prices on the items the company sells may go up (or the quality may go down).

Without employees, it's difficult to expand.  When a business has a harder time making money, it's forced to pay employees less.  The bonuses are smaller.  If profitability is difficult to achieve, a business will be forced to terminate some employees.  When it's difficult to make money, it's difficult to hire new people to expand.

So just to review this simple philosophy: When companies feel pain, everyone feels pain.  Why?

1. Companies can't afford to pay as much.  Employees earn less money (salary and bonuses).  Will the corporation offer $60,000.00 and tell you it would have been $70,000.00?  Of course not.  It will seem, to employees, like they are getting more because they are taxed less.  Who's going to make their employees think about the fact that they would pay them more if circumstances were different.

2. Companies cut costs.  Employees are less likely to keep their jobs.

3. People have a harder time finding a job with companies having difficulty affording more employees.  (Unemployment checks become more attractive).

The next step: Sending jobs overseas.

McCain started off on the right foot by making the example that in Ireland corporate taxes are 11% as opposed to 34% in the U.S.  Why did he fall asleep when it came to explaining that and making it more tangible? 

If jobs are outsourced to hundreds of thousands of people overseas, how much of that income tax is collected?  Zilch.  Is this better or worse for the U.S. government?  How does it affect the U.S. dollar?  When imports are more expensive (due to a weaker dollar), do you think the company buying the imports will take the hit, or do you think the cost is passed down to the customer?  Again, prices go up, and there are fewer jobs for U.S. citizens.

(I realize Democrats have a rebuttal for every one of the issues I'll discuss.  A tax credit to corporations who don't send jobs overseas, right?) 

What about starting a business overseas for more favorable tax treatment?  Now you have a corporation making tons of money, but does the U.S. government ever collect the corporate tax on that?  The cost to everyone in our country of higher taxes is not worth the reward. 

One argument is that they won't actually make it harder for corporations to make money.  But where will this money come from?  Who is going to be taxed?  If corporations aren't going to feel the pinch, then you have to ask, 'who is?'  Because the money doesn't just appear out of nowhere.  To say corporations won't feel it would be to discredit the first argument.  The result is voters find themselves playing an energy draining game of political "whack-a-mole" searching for answers.

When it's difficult for a company to grow, it becomes less motivating to start new businesses and that seriously hurts our country as a whole.  Almost every company in the U.S. started as a start up.  Entrepreneurship contributes enormous growth to our great country.  If you want less competition (thus less quality goods and services) you make corporate growth harder.  If you want bigger corporations, you should make corporate growth harder (because in a way, less competition benefits the big players already in place).

I said I would try to keep it short so I won't go on for hours on how the trickle down effect works.  And I'm not trying to convince our readers to change who they are as a person.  (I haven't been able to change one single person as long as I've been alive).  As long as you know how this scheme works.  The government tells you they are only taxing the big bad corporations.  They even tell you they will send you a small check (which doesn't seem small when all you have is information based on today's prices and paycheck).  But the real picture looks something like this:

Joe Makes $50,000.00 after tax	Joe makes $55,000.00 after tax
Bills $40,000.00	Bills $50,000.00
Left with $10,000.00	Left with $5,000.00

This doesn't even take into consideration that Joe (no not the friggen plumber) would likely make less money and have a harder time getting a job.
What would insult my intelligence (if I were the type to actually be insulted by the better political "player") is the part where they tell you they will send you a check in the mail.  This is because I'd get a check for $1,000.00 (AWESOME) but my bills go up by $5,000.00. 

The trick is you never figure out how it would have been in a different situation.  The person accepts the salary they get and never knows that it would have been higher if corporations had it easier.  Perhaps the salary does increase, but how much more could it have increased?  When my salary increases, I tend to buy more, which helps other corporations and the domino affect continues.  The person pays the price for the furniture, car, or food and never knows they would have otherwise been lower.  Perhaps car prices go down, but they would have gone down by more. 

The basic gist is that while person A might not rob you, he might stay friends with you and send person B to rob you.  Then person A robs person B.  So who robbed you?  If you can figure that out, then you can understand what's above.

Obama wants to raise taxes on oil companies which already have very low profit margins.  To put this simply, the oil industry keeps about 7.5 cents for every dollar in revenue it generates.  Google keeps something in the mid 30s and Microsoft is the mid 40s. This topic is enough for a whole other article, so I'll keep it simple.  For every gallon of gas purchased by you, the U.S. receives a bigger part of that price tag than the oil companies do in profit. It seems like they are making unfair profits because the number is so large.  But that's because the business is so big.  But compared to the expenses and the employees it has and pays (pay that is taxed by the government), it's a small percentage. 

I'll cut to the chase here.  What happens when it's harder for Exxon Mobil to make money?  Employees make less.  Perhaps gas prices are more than they would have been otherwise. 

What if it's less profitable to start oil companies?  There is less drilling when there is less profits.  So why make profits more difficult?  The reason supply has been so small relative to demand is due to under-drilling in the first place.  (Oil was at $10.00 per barrel less than a decade ago so it wasn't very profitable to drill, hence today's lack of supply.  Is the solution to make it less profitable to drill for oil?)

Here comes the part people will beat me up over...

If what I'm saying today is true, then why on earth would Obama use this in his argument? Why beat up on the oil companies? Why the "evil corporations"?

The easiest argument to get a large group of people to rally around is: The big, bad wealthy is keeping you down!  Why should you suffer while this wealthy person is on a yacht in Tahiti? You're being ripped off. You're suffering financially while the one with the connections is lining his pockets with your misery. 

How angry does this make you?!!!

This is the part you need to see clearly.  This is how votes are won.

Question:  Are you mad about oil prices? 

Everyone's answer: YES

Solution:  Then vote for me!

Of course I won't blindly vote for you.  So tell me what you'll do about it.

Answer:  I'll tax these bad oil companies that are doing wrong.

A great way to get votes. The problem is the oil companies aren't the ones who cause gas prices to go up. You may have heard about this little community called Asia. They have been buying oil. Recently China had no emergency reserves.  They have been buying all the resources around the globe from every country you can think of.  They have been buying lots of commodities from countries rich in natural resources because of the rapid domestic expansion.  The demand caused the price to go up.  And there's another little secret I have up my sleeve: There are other non-Asian countries that have had oil demand skyrocket too.

The easy argument is "Bush did it.  The Bush administration is funded by big oil. Cheney is the ex-chairman and CEO of Halliburton (HAL).  They are benefiting."  (The perfect argument to fit into the "four more years of Bush" shtick).

Remember: When major political issues are oversimplified, you are being manipulated.  I'm not saying I'm officially clearing anyone of any wrong doing.  I'm just saying, the way to get you to vote against the perceived big guy who has been ripping you off is to get you mad about something we all have in common.  We are all paying more at the pump.  Every time you fill up your gas tank, you have been getting mad.  Every time your bills go up, you are mad.  Prices of everything have been going up because commodity prices have been going up.  Vote Obama any time you see a gas station.  But it wasn't George Bush or Dick Cheney who caused the price increases.  It was a major global expansion.

Raising taxes on oil companies won't help this issue.  But it will certainly rally people around the "fight for the underdog" routine.

Question: Are you mad about corporate greed?

Everyone's answer:  Heck yeah!  It caused the credit crisis!

Solution: Then vote for me. 

Of course I won't blindly vote for you.  So tell me what you'll do about it.

Answer:  I'll tax these big, bad corporations that are doing wrong.

A great way to get votes.  The problem is you can't penalize any corporation making more than $250,000.00. This hurts everyone because it sends jobs overseas, it sends U.S. corporations overseas and that means the U.S. can't benefit by taxing either.  What this does is makes it harder for corporations to make money, and that pain certainly trickles down. 

Obama fought his way to the top.  Think about it.  Here's an African American who is likely going to end up the president of a country who enslaved African Americans less than 200 years ago.  I LOVE that (no matter what I think of his policies).  I love that I live in a country where you can do that.  That, in fact, is one of the major silver linings in the cloud.

I came from what you would call humble beginnings.  Raised by a single mom with three kids who put herself through college to become a teacher.  I worked since I was about 8 years old or younger.  I became handicapped at age 15.  But I knew that in this country I still stood a fighting chance.  I knew this is a country where if you fight, you can win.

So when I think of all the years I spent making my way to Wall Street as a trainee, wheeling to the bus stop in the snow in Queens New York, watching three non-handicapped equipped buses pass me followed by the fourth which dropped the lift for me so I can get to work, I feel good when I consider the fact that I can support my family comfortably. When I think of the odds I faced, and I know that people, with odds stacked against them ten times more than they were stacked against me, are people who can one day run a major corporation, state or country as long as they are in America, I feel good.

But the real problem is based on Obama's argument, he's not fighting as much for those who are slugging it out in the real world as one may be led to believe.  Many of those people will suffer indirectly (or maybe not so indirectly) due to his tax policies.  And I am fine with the idea that when people get laid off, they get a check until they get back on their feet again.  That's awesome.  But again, I grew up in Queens and came from humble beginnings.  And to this day, I know quite a few people who would rather collect a check at home than go out job hunting.  So while people will be paid less, and while companies will charge you more for goods and services, keep in mind that the extra money you pay, or don't receive is not only going to those honest people, trying to get back on their feet.

I'm into the "fight for the underdog" shtick.  I dig that.  Heck, if I didn't understand the reality of economics, I might even vote Democrat after listening to Obama telling me that he was going to fight for me.

But since I understand economics, I know that this argument is one that's being used to get people to vote for him.

Does that make me mad?  Does that make me resent this man?  NO.

Do I have bad feelings toward him?  Does that make him a bad person?  Does that mean he is destined to be a bad president? NO. He might be a great president. 

I simply want to make sure you understand what his tax policies will do.  And if you are okay with that, then I am too.  I just hate when people are convinced of one thing, while another is actually the truth.  This affects your bank account in a big way. 

McCain's campaign grossly failed to communicate this to U.S. citizens and it has suffered the consequences. So be it. I want to be sure that when you vote, you understand what you are voting for. This reminds me of when I used to tell my investors that when XYZ major investment bank wrote a research report recommending that they buy ABC stock, it doesn't mean they aren't the brokerage firm who is actually selling them the stock. It made me sick, and I had to say something to the people who worked hard for their money as I have mine.

Investors weren't foolish for not knowing what was really happening in that scenario either.  They just didn't understand how it worked, and they trusted that the institutions writing to them believed what they were writing and saying. 

Your thoughts are more than welcome so feel free to comment by clicking below.


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider